It is just under two years since financial advice ceased to be “free”. During that period, public confusion about advice seems only to have grown.
But with radical reforms to the pensions rules coming into force next year, it is more important than ever that consumers know what good advice looks like, where they can get it and how much it should cost.
The good news is that the quality of financial advice has probably never been higher than it is now. That said, not everyone needs it. If you have plenty of time, are confident in making financial decisions, have fairly simple financial affairs and have an interest in personal finance, you can get along quite nicely without one – especially if any decisions you make have a small overall impact on your desired lifestyle.
However, if you have more complex financial affairs – such as if you are self-employed, have multiple income sources, have children from different marriages or have assets overseas – then advice is more likely to be worthwhile or even essential.
Advice is also a good idea, at least initially, if you are less confident, time-poor, uninterested in personal finance, or if any decisions you make could have a major impact on your overall wealth.
Advice, planning, guidance
Providing financial advice on investments, pensions, certain insurance contracts and mortgages is highly regulated in the UK and most private individuals are classed as “retail” investors. Any firm that provides advice has to follow strict rules in relation to suitability, appropriateness and fair dealing.
Because some areas of advice relate to complex and difficult financial issues that can have a big impact on people’s lives, there are various protections in place, including professional indemnity insurance, a financial ombudsman service and a compensation scheme. It is a criminal offence for anyone to offer regulated financial advice without being authorised and regulated to do so.
Financial advice is based on an assessment of your personal situation and is tailored to meet your specific needs. It results in written recommendations, and even if it is focused on one specific area, the advice firm is still responsible for pointing out if they think other matters need to be considered.
Guidance is where a financial services company provides you with information to enable you to make your own decision, including arranging any financial products. The information is usually based on people like you, but crucially it is not specific to your situation.
Although there is still protection in relation to financial products being fit for purpose, this does not extend to the suitability of such products for you. If you suffer a bad outcome, you will have no protection or redress available.
Over the past 10 years, and especially since the advent of the retail distribution review, new providers of low-cost investment and pension products have been launched and some people have confused these companies’ guidance with advice.
The City regulator is working on a review that will hopefully provide clarity but broadly, any online portfolio service that provides information on investment matters, including which portfolios might be suitable is not providing tailored advice, but generic guidance.
If you have relatively simple needs, modest wealth or income, high confidence, plenty of time and/or any decisions you take would have a relatively low impact on your overall wealth, then guidance may well be the best solution for you. If your needs are more complex or your financial decisions might have a high impact, then you’ll probably need advice that is tailored to your situation.
The next questions are how often you’ll need advice, how you should choose an adviser, and how you should pay for his or her services.
Frequency of advice
The Financial Ombudsman recently upheld a complaint against HSBC for not providing ongoing advice to a client even when the client was paying an annual percentage charge for such advice.
This raises a crucial point: you need to decide whether you need an ongoing advice service or not, and if so, the frequency of that service.
My view is that there is a substantial number of people being over-served and overcharged by financial services firms because the firm is providing an ongoing annual service that is not necessary or not good value for money.
This has become more apparent since the introduction of the ban on product-based commission incentives to UK advisers: many financial services firms have tried to replace commission payments from products with “adviser remuneration” facilitated by deductions from financial products in return for an ongoing advice “service”.
Sending out periodic valuations and having a one-hour annual meeting is not an advice service, and unless value is being delivered in excess of the advice costs, it does not make sense to use such firms.
If you wish to focus on one particular issue, for example reviewing your pension arrangements, protecting your family in the event of your death, or setting up a tax-favoured investment, you might need one-off advice rather than an ongoing service. More complicated circumstances and substantial wealth might require a more comprehensive and ongoing advice service.
This term has become more prevalent over the past 15 years. A lot of stockbrokers and investment managers call themselves wealth managers when really they focus only on investment assets and have limited understanding of tax and legal issues and no concept of financial planning.
Some restricted financial advisers, with limited investment or tax knowledge, focus more on advising and arranging tax wrappers such as self-invested personal pensions and insurance bonds, while some financial planners focus purely on the overall plan and do not provide investment services.
It is unlikely that any wealth manager can be expert in all areas. Sometimes larger firms have different departments and seek to offer a “one-stop shop”, while others have a panel of outside experts in different disciplines on which they can call to provide focused advice and service as necessary.
Paying for advice
There are numerous ways that financial planners and wealth managers charge for their services, including fixed initial and service fees, hourly charges, a percentage of assets invested (sometimes known as ad valorem), a proportion of any tax saved, or product commissions received on non-regulated products.
Sometimes these charging methods are combined. The key point is to know what you are paying and why. Regardless of what the rules say and no matter how convenient it might be, I think you should agree the fees for the advice and services you use and pay them yourself, not by way of deductions from financial products.
Advisers who agree and charge explicit fees rather than relying on payments from transactions or products have fewer conflicts of interests in the advice that they give. It is also easier for you to determine whether or not those fees have been good value for money.
Many private banks and certain restricted financial advisers use their organisation’s own products and funds, which are often more expensive than would be the case if you used an independent adviser, who do not have in-house investment products.
The more complicated the product or solution, the more likely it is to be expensive due to high fees and costs. Some advisers, who do not charge standalone advice fees, insist on being paid by way of a charge deducted from investment products. This is a bit like your doctor earning a commission every time he prescribes you drugs: in such a situation you can expect most diagnoses to need medication.
Bear in mind that there are some areas of advice that are not regulated or not subject to the commission ban, such as financial planning, tax planning, trusts, wills and certain life and disability products that do not acquire a surrender value.
Achieving good financial outcomes, however you define them, will determine whether or not you’ve made good financial choices. If you don’t have the knowledge, confidence and time to make those decisions on your own, then take time to choose the right professional adviser to provide tailored advice. It could well be the best investment you ever make.
Adviser checklist: important questions you could ask
● Do you provide structured financial planning as the core service before offering investments or other services?
● Do you offer a transparent fee for service charging structure that is not linked to the arrangement of products or investments?
● Do you offer products from the whole marketplace or do you offer only a restricted range from a few companies?
● Do you have experience of dealing with people like me in terms of personality, family situation, level of wealth and wealth issues?
● Do you and your colleagues hold advanced-level professional financial advice qualifications and, if so, what are these?
● What arrangements do you have to bring in expertise from outside your firm if needed, such as legal or tax planning, and how is this integrated into your own service?
● How are the professional staff in your firm remunerated?
● Do you ever receive sales commissions from any source – such as insurance products or introducer fees from other professionals – and if so will you rebate this either back into the product or directly to me?
● What is your investment philosophy and do you have a comprehensive document that sets out your approach and rationale?
● Would you allow me to speak to one of your clients in a similar situation to myself before committing to using you?
● How many meetings and discussions can I expect to formulate the initial strategy and how long is this likely to take?
● What is the minimum commitment required from me in terms of time and fees?
● What level of resources does your firm have in terms of financial planning, investment and tax expertise?
● Who are the actual people with whom I and my family will be dealing on a day-to-day basis?
● If something goes wrong with the service or your advice, to whom do I complain?
Jason Butler is a qualified financial planner with Bloomsbury Wealth and author of the Financial Times Guide to Wealth Management.
Get alerts on Retail Distribution Review when a new story is published